In effect, paying off debt is the same as investing at 12–30%.

Americans in their 40s and 50s are devoting more of their discretionary income to paying off debt rather than savings or investments for retirement. Economically, this makes good sense.

Paying down debt is the same as investing; you’re giving up one asset (cash) in exchange for eliminating one liability (the debt) with no change in your net worth. The interest expense you save is, in effect, your return on an “investment” in debt reduction. Read the rest of this entry »

The United States is embarking on a rapid-fire experiment in borrowing without precedent

The United States is embarking on a rapid-fire experiment in borrowing without precedent, as the government and corporations take on trillions of dollars of debt to offset the economic damage from the coronavirus pandemic.

The federal government is on its way this year to spending nearly $4 trillion more than it collects in revenue, analysts say, a budget deficit roughly twice as large relative to the economy as in any year since 1945. Read the rest of this entry »

The youngest American adults are facing what is, for most of them, the first serious economic crisis of their working lives. By most measures, they are woefully unprepared.

Nathaniel Popper, New York Times | Monday, April 6, 2020

The last time a serious economic downturn hit in 2008, Evan Schade was in high school and the crisis seemed like a news event that happened to other people. This time, as the coronavirus has brought the economy to its knees, it has become a personal affair.

When nonessential businesses were closed last month in Kansas City, Missouri, where he lives, Schade, 26, lost his job at a carpet store and almost all of the shifts in his second job at a coffee shop. His girlfriend, Kaitlyn Gardner, 23, was laid off from a different coffee shop.

The money they have in their bank accounts, a little more than $1,000, is enough to cover only this week’s $800 rent check — forget about his $300 student loan payments or the health insurance he was hoping to finally sign up for. The couple have spent their time at home applying for unemployment and fruitlessly looking for new work.

Equity investors just witnessed the worst quarterly plunge since the financial crisis, and some expect more losses ahead.

Asset prices could fall further as the range of negative outcomes from the coronavirus pandemic is much wider than during the global financial crisis, according to Oaktree Capital Group co-founder Howard Marks.

DoubleLine Capital Chief Investment Officer Jeffrey Gundlach says the S&P 500 Index is likely to reach new lows in April, with economic uncertainty further riling investors. Read the rest of this entry »

Supercharged Debt Bets Unravel

For years, regulators have tried to make the financial system safer by blocking banks from taking on the extreme leverage that almost toppled the industry in 2008. Turns out, the risks just moved.

In a matter of days, a slew of trades unraveled to expose various forms of soured levered bets at their heart. Citigroup Inc. was among banks that tried to sell off $1.3 billion of risky loans to unwind leveraged wagers by clients. Funds that borrow to load up on mortgage bonds fed a flood of liquidations. Large municipal-bond funds are selling billions of dollars in positions, too. Read the rest of this entry »

Gold jumped more than 1.5% on Wednesday as investors continued to seek safe havens on mounting concern that the near-global lockdown to fight the coronavirus pandemic would spark a deep economic downturn.

Spot gold was up 0.7% at $1,582.54 an ounce by 1241 GMT, rebounding from a 3.1% slump in the previous session. U.S. gold futures gained 0.1% to $1,598.00.

“Gold once again underpinned its status as a safe haven during the current corona crisis,” Julius Baer analyst Carsten Menke said in a note, adding that constraints to global air travel and the closure of gold refineries are showing up in price premiums. Read the rest of this entry »

Loan applications to purchase U.S. homes declined for a third straight week to the lowest since November 2016 as coronavirus mitigation efforts stymied house hunting.

The Mortgage Bankers Association’s purchase index dropped 10.8% in the period ended March 27 after tumbling 14.6% — the worst two weeks since May 2010, data from the Washington-based group showed Wednesday.

While home buying is falling victim to the pandemic-related economic stop, mortgage refinancing increased for the first time in three weeks, indicating the Federal Reserve’s interest-rate cuts and massive purchases of mortgage-backed securities may be starting to bear fruit.

The measure of refinancing jumped 25.5% as the contract rate on a 30-year fixed loan fell to 3.47% from 3.82%.
The MBA’s broader index of all mortgage applications increased 15.3% last week.

Nothing is forever, not even debt. Every borrower eventually either repays what they owe or defaults. Lenders may or may not have remedies. But one way or another, the debt goes away.

One of Western civilization’s largest problems is we’ve convinced ourselves debt can be permanent. We don’t use that specific word, of course, but it’s what we do and is why government debt keeps rising.

We borrow faster than we repay previous borrowing—and I mean governments everywhere, China as well as the US.
Our leaders have no real plan to reduce the debt, much less eliminate it. They just want to spend, spend, spend forevermore. And most citizens are okay with that.

As a result, I think we will spend the latter part of the 2020s going through a kind of worldwide bankruptcy. We won’t call it that, and it will take a lot of argument because we won’t have a court to take charge.

But we will collectively realize the situation can’t go on and find a way to end it. I’ve taken to calling this “the Great Reset.”

Once the Great Reset is over, we’ll find a much better world waiting for us. Getting there will be the hard part.